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Managing the financial health of a small business can seem like a daunting task. Fortunately, there are several financial strategies business owners can implement to simplify the process. One important tool most entrepreneurs take advantage of is business financing.
There are long-term benefits to securing business financing, including covering necessary operating expenses, improving the business credit score, and decreasing your income tax liability through interest deductions.
In this article, we explore what financing options are available to small businesses and how to get through the application and approval processes quickly.
When should you consider small business financing options?
Every small business is different. Entrepreneurs are tasked with managing the businessâs financial position throughout many different stages of growth. It can be challenging to know when itâs time to secure additional business funding because the need for capital often arises when itâs least expected. If you own a business that is in any of the following phases, you may want to consider what financing options are available to you.
If you are a new business owner, you are probably realizing that there are significant costs associated with turning a business idea into a fully operational company. Startup costs may include commercial real estate, equipment, legal costs, inventory, licenses and permits, pricing guns, employee pay, marketing expenses, and more. If you are starting a new business, exploring business financing options, like small business loans and capital investments, may be just what you need to turn your dream of entrepreneurship into a reality.
Most business plans are created with growth strategies in place. If youâve built a business from the ground up, purchased a franchise, or bought an established company, itâs important to recognize when itâs time to consider expansion. If youâve reached the following milestones, financing options may be the answer to funding the next stage of growth.
- Stable revenues â business finances show a consistent profit for more than two yearsâ time
- Loyal customers â customers are requesting more products or more services
- Industry growth â there is significant market growth in the industry
- Physical growth â more inventory, customers, or staff than your current workspace can accommodate
Cash flow fluctuations
Periods of low cash flow are normal for small business owners. Some businesses experience cash flow fluctuations because of seasonal business trends, growth periods, or economic factors. Whatever the reason, if cash flow is inconsistent, it may become difficult to cover payables, like mortgage payments and payroll. Business financing can give you the working capital you need to cover day-to-day cash needs or simply get you through the winter.
Finding the capital to cover large purchases does not always line up with the cash flows of the business. If your business needs require a big-ticket item to get started, keep operating, or reach the next level, considering business financing can give you the cash you need to cover those large purchases, including:
- bulk inventory purchases
- office space
- computer hardware and software
- repairs or renovations
Refinancing describes the process of using a new loan to pay off other debts. Typically, the result of refinancing is a new financing agreement with more favorable repayment terms, like a lower monthly payment. If you are a business owner that has debt from business credit cards, merchant cash advances, or other small business loan options, refinancing may be a great way to consolidate monthly payments, lower interest rates, and get your finances moving in a positive direction.
Financing options for small business owners
There are several different ways to secure business funding. Depending on the amount of funds your business needs, your financial situation, and the circumstances surrounding the financing, one of the following financing methods may be right for your business.
Angel investors are private investors, or venture capitalists, that provide funding for a business through a one-time investment or a series of capital contributions. They may be found through friends, families, nonprofit organizations that work to match investors with entrepreneurs, like funded.com, and even some social media sites, like LinkedIn. Typically, the funds are provided in exchange for a percentage of ownership in the company.
Crowdfunding is the process of collecting small monetary donations from numerous sources. Crowdfunding may require that the business owner give equity or other rewards in exchange for the funds or may not require any return at all. Crowdfunding has become a popular (if typically unsuccessful) method of financing startups in the last decade.
Small business loans
Small business loans are available to borrowers through traditional lenders, like banks or credit unions, or through alternative lenders, like Biz2Credit. There are many different loan options for entrepreneurs, but selecting the best option depends on your individual circumstances.
A term loan is a type of traditional financing where borrowers that are approved for this type of financing receive a lump sum payment upfront and then make regular payments of interest and principal. Term loans can be secured, where some form of collateral, usually business assets, is held by the lender, or unsecured. This loan type appeals to small business owners because it offers access to the full loan amount upfront and can be repaid early, sometimes with little or no prepayment penalty. Small businesses may be eligible for either long-term or short-term loans when choosing a term loan.
Equipment financing, also known as an equipment loan, is a funding option for small businesses that need to purchase new equipment or repair existing equipment. Equipment financing offers low down payments and has flexible approval requirements since the purchased equipment acts as collateral on the loan. The repayment terms of the loan generally coincide with the expected useful life of the asset.
SBA loans are a type of business financing where the funds are partially guaranteed by the U.S. Small Business Administration. SBA loan programs, like the SBA 7(a) loan, disaster loans, or microloans, can be used to increase working capital, make large purchases, refinance high-interest debt, and more. Borrowers often choose SBA loans if they can meet the strict approval requirements and lengthy application process because they offer low down payments, low annual percentage rates, and long repayment terms.
Business line of credit
A business line of credit is revolving credit, like a business credit card, where the lender approves a maximum amount of credit. The borrower can then withdraw funds at any time, as long as there is available credit. Interest is paid only on the amount of funds that have been withdrawn, so payments remain reasonable. Having a line of credit is a smart financial decision because it allows small business owners to have instant access to capital.
Real estate financing
A commercial real estate (CRE) loan gives the borrower access to a large amount of capital. The real estate that is purchased is then used to secure the loan. CRE loans can be a great financing tool for securing land or a new structure, expansion, a new business acquisition, or funding renovations. CRE loans often allow lower interest rates than other term loans, so they are a great choice for business owners looking to purchase or refinance real estate.
How to get qualified for business financing
If youâre interested in starting the application process for a small business loan, you may be concerned about qualifying for business financing. Since there are so many different sources of business funding available, there is likely a loan that is right for your unique business. The approval requirements for business financing depend on the amount of the loan, the lender, the type of loan program, and the purpose of the funds. Some things that lenders evaluate when determining eligibility include the following:
A personal credit score or a business credit score is used by lenders to quickly evaluate the credit history of an individual or a business. Individuals with higher credit scores will qualify for more types of loans and be offered better repayment terms, but even entrepreneurs with bad credit can get a loan. In fact, a business loan with good payment history is a great way to improve the businessâs credit score for future financing eligibility. If you donât know the condition of your personal finances or business credit, you can check your personal credit report for free at AnnualCreditReport.com and your business credit score at Dun & Bradstreet.com.
Lenders will consider a businessâ cash flow and annual revenues during a loan application review. A business that can provide evidence of regular, positive cash flow shows lenders that they are able to take on a monthly loan payment. Lenders will review the financial health of the business using financial statements, like the income statement and balance sheet that are available through basic bookkeeping or accounting software, as well as federal income tax returns.
Time in business
When applying for a business loan, lenders will consider the length of time a business has been operating. Lenders use the dates that the company has had a business bank account open, not the amount of time since the business owner registered the legal entity. Businesses that have been operating for less than one year are considered high-risk and may have trouble getting traditional bank loans, but new businesses can often secure financing by working with online lenders, like Biz2Credit, or providing a personal guarantee or collateral.
Tips to get fast approval for a small business loan online
When you are starting a new business or looking to improve an established business, you shouldnât have to wait weeks or months to get approved for funding. To secure quick business financing online, consider these tips.
Choose an online lender
Online lenders can fund business loans much faster than traditional brick-and-mortar financial institutions. The rapid response time of online lenders, like Biz2Credit, begins with an application process that can be completed online. Borrowers can receive a status update on their application in as little as one or two business days. Some online lenders can even provide funding within 24 hours of receiving a loan application.
Gather documents ahead of time
When applying for any type of business financing, you will need to provide some required documents to the lender. The documents may include organizational paperwork, financial statements, business debt schedules, accounts receivable ledgers, tax returns, and more. If you have the documents handy before you start your loan application, you will be able to expedite the approval process.
Know your business needs
If you have a clear idea of your business needs and goals before reaching out to a lender, the entire application process will move faster. Some details to consider include how much money youâre seeking, what the funds will be used for, the monthly payment amount you can afford, and the loan term youâre hoping for. Discussing the specific details of your businessâs situation will allow the lender to match you to the right loan product much faster.
It may be time to consider business financing options if you are starting a new business, ready to expand your current business, making large purchases, or just looking to supplement cash flows. Business financing options include angel investors, crowdfunding, and small business loans, like the term loan. To speed up the approval and funding processes, consider using an online lender, like Biz2Credit, which was able to help New York business owner, Maryam Zadeh, get funding for her fitness business in just 48 hours.